Teva Seen Struggling in CEO Search as Board Under Fire

The departure of Jeremy Levin, former chief executive officer of Teva Pharmaceuticals Industries Ltd., may hurt the value of Teva’s bonds because it “creates the potential for diversion from the clearly articulated business strategy” created by Levin and the board, Moody’s Investors Service said in a statement. Photographer: Scott Eells/Bloomberg

Oct. 31 (Bloomberg) -- The shares of Teva Pharmaceutical
Industries Ltd., the world’s largest generic-drug maker, have
plunged 42 percent since their 2010 peak. Now the man hired to
turn the company around just 18 months ago is gone, and analysts
say it may be tough to find a replacement.

Jeremy Levin, a former Bristol-Myers Squibb Co. executive,
joined Israel-based Teva as chief executive officer with a
reputation as one of the industry’s top dealmakers. A rift over
the company’s future with Phillip Frost, the U.S. billionaire
who is board chairman and Teva’s biggest individual shareholder,
led to Levin’s ouster, opening questions about the ability of a
high-powered replacement to manage Teva going forward.

The queries follow by weeks the company’s announcement it
would fire 10 percent of its workers to prep for the loss of
patent protection for its $4 billion multiple-sclerosis drug
Copaxone in 2014. Teva is also struggling with pricing pressure
as countries cut back drug funding.

“A candidate will now ask himself if he should be joining
a company in which the last CEO couldn’t function,” said Ori
Hershkovitz, a partner at Sphera Funds Management Ltd. in Tel
Aviv. “When Levin took the job at Teva he was considered a
pharma god. But at Teva there’s only one boss and that is
Phillip Frost. And Jeremy made the mistake of thinking he would
be able to manage the company.”

An executive like Levin with decades of global industry
experience will be reluctant to step in, said Hershkovitz, who
owned shares of the Petach Tikva-based company in the past and
before today was betting they would decline.

Interim CEO

Chief Financial Officer Eyal Desheh will be interim CEO
while the board seeks a permanent replacement, the company said
yesterday in its statement.

Levin’s conflict with Frost, a cigar-smoking dermatologist
who has three times built successful companies, came to light as
Teva sought to fire 5,000 workers, a plan that would have
included hundreds of cuts in Israel.

While Levin sought a conciliatory approach by coordinating
job cuts with the labor union head, Frost supported a no-compromise tactic, Israel’s Channel 2 reported this week, citing
a letter from the executive committee to the board.

“The differences were over nuances rather than
disagreement about the strategy itself,” the 76-year-old Frost
said in a conference call with analysts yesterday. “It just got
to the point where the slight differences couldn’t be resolved
and we thought it was better to part ways.”

Teva’s ADRs fell 8.1 percent to $37.70 at the close in New
York, the biggest drop since Aug. 8, 2011. The company, which
reports third-quarter earnings today, has a market value of
about $31.9 billion. Teva fell 1.9 percent to 132.7 shekels at
2:05 p.m. in Tel Aviv.

Analyst Questions

Analysts on a 50-minute conference call yesterday peppered
Frost with questions on whether Teva could attract a qualified
replacement amid concern about interference from the board.
“The fear is that it’s a very dysfunctional organization,”
David Maris of BMO Capital Markets told Frost on the call.

“The issue is not so much that Levin has gone, although
that in itself is bad,” said Ken Cacciatore, an analyst at
Cowen & Co., who has the equivalent of a buy rating on Teva
shares, in a report.

“The issue is that we are unsure of what kind of talent
that Teva will be able to recruit,” Cacciatore wrote. “The
answer will be in whether the new CEO is seen as strong enough
to dictate the appropriate terms to create value.”

Company Location

Another challenge for attracting talent will be location.
Teva is based near Tel Aviv, and much of its management team,
including the new interim CEO Desheh, sit in Israel. As Frost

and Levin, a South Africa-born citizen of the U.K. and the
U.S., sought to fire Israeli employees, local politicians and
the media attacked them for ignoring tax benefits that Teva had
enjoyed for years.

Potential candidates would “be very hesitant to be jumping
into a debate about the company in its relationship with the
government and of the role it should play in the Israeli economy
as a so-called national champion,” said Andre Spicer, professor
of organizational behavior at Cass Business School in London.
“Tel Aviv is probably not the hotbed for pharma executives.”

Frost promised on the conference call that Teva will
attract “talented, ambitious” candidates for the job.

Asked by Liav Abraham of Citigroup Inc. if he would
consider taking the job himself, Frost said he wasn’t willing to
live in Israel, as the new CEO will have to do, and the job
requires someone younger. The chairman didn’t return phone and
e-mail messages seeking comment.

Speaking Up

At the same time, a new CEO will have to deal with board
members who don’t mind speaking up in public about the company’s
actions, a role typically left to management at other companies.

Director Chaim Hurvitz, a former Teva executive whose
father Eli Hurvitz led Teva as CEO for more than two decades,
said Oct. 16 in an interview that the company would be ready to
look for significant acquisitions in 2014. Yesterday, the board
dispatched director Amir Elstein, along with Desheh, to talk to
Israeli reporters on a conference call.

The Teva board’s involvement is “no more, and not
different than, within other companies,” said Elstein, who is
also a former Teva executive, in an e-mail yesterday. “We
believe we will not have trouble finding an excellent CEO.”

Frost was elected chairman in 2010 to replace Eli Hurvitz,
who was ill and died in 2011. Israeli politicians lauded the
elder Hurvitz as a patriot in Israel who built the country’s
largest publicly traded company.

In-House Candidates

At least two possible successors are within the company.
Desheh, the CFO, is a candidate, Elstein said. And Hershkovitz,
the hedge fund manager, said he expects the company to hire Erez
Vigodman, a Teva board member with an accounting background.

Vigodman helped Makhteshim-Agan Industries Ltd., where he’s
CEO, prepare for its eventual sale to a Chinese company in 2010.
Makhteshim struggled to revive growth just as Teva is now
struggling, said Hershkovitz. Vigodman or whoever comes next
will be charged with selling Teva assets, he said. A spokeswoman
for Makhteshim-Agan said the matter hasn’t been addressed at the
company, and Vigodman is still CEO.

At Bristol-Myers, Levin was an architect of an aggressive
acquisition strategy overseeing the so-called “string of
pearls” policy of small deals to replace revenue lost as blood
thinner Plavix faced generic competition. He was restructuring
Teva before patents protecting bestselling multiple-sclerosis
drug Copaxone expire next year and as the generic-drug unit
struggles with pricing pressure and competition.

Past Acquisitions

Levin took over after his predecessors spent more than $30
billion in the past decade on acquisitions while failing to wean
Teva off its dependence on the Copaxone drug. He was global head
of business development and strategic alliances at Novartis AG
from 2003 to 2007 before joining Bristol-Myers.

He has worked as a practicing physician and has a medical
degree from Cambridge University and a doctorate from Oxford
University in molecular biology.

Saddled with one of the industry’s highest debt loads,
Levin opted to boost profitability by trimming costs and
building the company’s branded-drug pipeline through small deals
and partnerships in areas such as respiratory and neurology.

Frost joined Teva’s board after his company, Ivax Corp.,
was acquired by Teva in 2006 for $7.4 billion. In 1972, he
parlayed a $50,000 investment in struggling Key Pharmaceuticals
Inc. into an $825 million sale to Schering-Plough 14 years
later. Now he is chairman and CEO at Opko Health Inc., a U.S.-
based biotechnology company that doubled its market value this
year to about $4 billion.

A Philadelphia native, Frost lives in a $53 million mansion
on Star Island near Miami and also has investments ranging from
gold mines to cigarette seller Vector Group Ltd.

Bond Value

The departure of Levin may hurt the value of Teva’s bonds
because it “creates the potential for diversion from the
clearly articulated business strategy” created by Levin and the
board, Moody’s Investors Service said in a statement.

While it may not be simple, Teva will eventually find the
right candidate, said Timothy Chiang, an analyst at CRT Capital
Group LLC.

“Teva will have a tough time finding that guy near term
but Teva is the largest generic-drug company in the world,”
Chiang said by telephone. “They have a long history of success
as a generic drug company and as a specialty pharmaceutical
company.”